I'm David Rosenthal, and this is a place to discuss the work I'm doing in Digital Preservation.

Sunday, October 4, 2015

Pushing back against network effects

I've had occasion to note the work of Steve Randy Waldman before. Today, he has a fascinating post up entitled 1099 as Antitrust that may not at first seem relevant to digital preservation. Below the fold I trace the important connection.

All over this blog (e.g. here) you will find references to W. Brian Arthur's Increasing Returns and Path Dependence in the Economy because it pointed out the driving forces, often called network effects, that cause technology markets to be dominated by one, or at most a few, large players. This is a problem for digital preservation, and for society in general, for both economic and technical reasons. The economic reason is that these natural but unregulated monopolies extract rents from their customers. The technical reason is that they make the systems upon which society depends brittle, subject to sudden, catastrophic and hard-to-recover-from failures.

It is, therefore, important to find ways to push back against the network effects that force consolidation. But it is extremely difficult to find such ways. Waldman's post looks at doing this in the "sharing economy", specifically in the case of Uber:

Right now, the greatest danger to to the rest of us from “sharing
economy” platforms like Uber is that these platforms benefit from
network effects that render them “winner-take-all”. Today’s apparent
innovators are really contesting a tournament to become tomorrow’s
monopolists. The outcome we should be hoping to achieve is neither to
strangle these products in their cribs (they are often great products
that create real efficiencies), nor to permit wannabe monopolists to win
their prize. We should want competitive marketplaces in the products
these platforms provide.

The key to Uber's business model is their claim that the drivers are not Uber employees, even if their entire income comes via Uber:

Much of the network effect that might render Uber-like platforms
anticompetitive derives from density of suppliers. Customers flock to
the platform that has the densest, richest set of offerings. When
suppliers pick just one, they prefer to work for the platform that has
the most customers. So once one platform pulls ahead, a cycle may kick
in, virtual or vicious depending on your perspective, leading to a
single dominant platform. But if suppliers “multihome”, if pretty much
all of them sell through pretty much all of the networks, this “market
cramp” can be interrupted and multiple platforms might survive. ... But ... platforms’
incentives are to make it hard as possible for suppliers to be
promiscuous.

Waldman's suggestion is that instead of directly regulating these platforms via antitrust law, whose enforcement has become lackadaisical, they should be regulated indirectly, via the tax code. If, to be taxed as self-employed (1099) rather than employed by Uber, its drivers were:

required [to] multihome ... platforms’ incentives would reverse.
They would face a choice of bearing much higher per-supplier costs (as
“suppliers” become employees), or of insisting that suppliers also do
business elsewhere. All of a sudden Uber would need Lyft and Lyft would need Uber ... Reclassification of suppliers as
employees would serve as an antitrust doomsday device for sharing
economy platforms.

Ever since the antitrust action against Microsoft produced only token consequences, attempting to directly regulate technology markets to prevent monopolization has seemed futile. But Waldman shows a way in which indirect pressure could be more effective.

For example, Amazon is effectively a monopoly in the cloud. Suppose, for example, insurance companies started pricing in the monoculture risk this imposes on Amazon's business customers. Companies would have an incentive to have backup systems in other vendor's clouds. The cloud industry would have incentives to standardize APIs and implement effective fail-over mechanisms. Amazon might end up a bit less dominant, and socienty might end up a bit less brittle.

Perhaps this isn't a very realistic example. But it is worth following Waldman in thinking about indirect as opposed to direct ways to push back against the negative aspects of network effects.